Ethanol Demand To The Rescue For Corn

Source: By Clif Droke, Seeking Alpha • Posted: Tuesday, February 11, 2020

Summary

  • After weeks of lagging other commodities, corn is poised to catch a break.
  • Rising corn-for-ethanol demand could be the catalyst for a corn rally.
  • China’s corn-for-food demand is also expected to pick up from here.

Corn prices are testing a multi-year low and have convinced many bulls to throw in the towel on the yellow grain. Unlike wheat, soybeans and other grains, corn prices have been under persistent selling pressure for several weeks. But just when things are looking darkest for the corn market, a new ray of hope has emerged. Increased ethanol demand is expected to give some much-needed support for corn in the very near term, which we’ll discuss in this report.

In the last few days, China’s central bank has injected $174 billion (1.2 trillion yuan) worth of liquidity into the nation’s financial market. This has already had a palpably bullish effect on China’s stock market, even though ag commodity prices haven’t yet reacted to this massive sovereign support. However, based China’s need to import food from some its trading partners in the coronavirus’s wake, we could soon see some renewed upside pressure in the grains.

China’s need for corn and other farm commodities from abroad hasn’t abated in spite of the coronavirus, according to the latest news. A Reuters report noted that Chinese demand for corn will likely be divided between the U.S. and Ukraine due to competitive pricing between the two countries. It was also stated that Ukraine exported some 208,000 tons of corn to China during January 25-31.

However, China’s food demand by itself can’t be completely counted on to lift prices in the immediate-term (1-4 week) outlook. Corn, after all, has had a rough last few months and has failed to participate in the rally that other ag commodities experienced in late 2019. Instead of joining the party other grain markets were having last year, corn was left in the lurch and has been slumping since last month. It hasn’t yet gained enough traction for anyone to assume that China’s food needs will bail the commodity out in the immediate term.

The news that is giving ag traders a lot more hope, though, is that ethanol demand has been increasing lately while export sales have also been rising. As Rabobank’s Michael Magdovitz told Reuters in a recent article, “U.S. corn appears to be the game in town for exports,” in part due to rising corn-for-ethanol production. Shedding some additional light on this theme, ag market analyst Tom Fritz of International Futures Group noted that “corn prices should be the market [for] most interested importers at least until the new crop from Argentina comes online.”

Meanwhile, stocks of corn-based ethanol fell to 23.47 million barrels per day in the latest week, while output rose to 1.08 million barrels, according to the U.S. Energy Information Administration (EIA).

Commenting on this development, DTN/Progressive Farmer observed:

Domestic ethanol inventory fell for the first time in five weeks during the final week of January, while production rebounded after two weekly drops and blending demand held to the upside, according to data released Wednesday, Feb. 5, from the Energy Information Administration.

Progressive Farmer further noted that, according to EIA data, ethanol inventories fell to 770,000 barrels for the most recent reporting week, nearly 2% below comparable year-ago inventory levels. Until now, many traders were worried that ethanol demand was too low to support the corn futures price. With the latest data, however, participants have reason to hope that China’s corn-for-food demand, coupled with rising ethanol demand, will lead to a price rebound in the upcoming weeks.

Turning our attention to my favorite tracking vehicle for corn, the Teucrium Corn Fund (CORN), the chart below shows clearly the headwinds that corn has faced in the last several weeks. The Teucrium Corn Fund has been consistently unable to break out above the $14.90 level, which was last tested on Jan. 2. I consider $14.90 to be a key resistance barrier that must be overcome in order for the bulls to regain control from the sellers. A strong close above this level would push the ETF above a three-month price ceiling and signal that the bulls have gotten control of the short-term price trend.

Teucrium Corn FundSource: BigCharts

Until the $14.90 level in the corn ETF is overcome, however, the lateral trading range that has been in play since September will likely continue. I expect that the $14.00 level should serve as the lower boundary for the Teucrium Corn Fund for now.

On a related note, it should also be remembered that the futures equivalent break-even cost of production for corn is between $3.50 and $4.00. At the most recent March 2020 corn futures price of $3.81, corn is already a bargain and should begin to attract some interest from value-seeking traders. I also believe that once traders pick up on the theme of rising ethanol demand, corn prices, along with corn ETFs, will see increased bids from buyers.

In summary, corn is likely approaching another turning point in which buying interest from bargain seekers will pick up from here. Higher prices for corn are likely in the coming weeks once coronavirus fears have dissipated and traders begin focusing on the increasing demand in corn-for-ethanol production. In view of the factors we’ve discussed here, traders who don’t mind the volatility risk inherent in the ag commodities can do some nibbling in corn down to the $3.50 level in March corn and down to the $14.00 level in the Teucrium Corn Fund.

|